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Year Of Reckoning For Brick And Mortar Retailers

For Brick and Mortar (BAM) retailers, 2014 will prove to be another challenging year. As economists talk of a slow and gradual recovery (latest jobs numbers indicate recovery will be at a snail’s pace), BAMs will be hard pressed to drive topline growth. Based on an evolution in the consumer market fueled by demographic shifts, behavioral changes and consumers’ attitudes toward the economy, retailers with a physical presence will be navigating through a minefield in 2014.

If you build it, they will come. The old retail growth model was simple. It took off in the 1970’s with the mall building surge. Successful retailers rode the coattails of baby boomers who were actively buying for growing families by erecting store fronts in a neighborhood near you. Having enough stores close to enough boomers equaled a solid growth plan.

There was no real challenge to the “Build It, They Will Come” model, at least not until the Internet spawned online shopping. The coveted Baby Boomers were aging and no longer had the need to accumulate “stuff,” while the next generations X and Y, who were more mobile-savvy and open to a new online model, became the apple of retailers’ eyes. Same store sales began to decline and the real estate model began to deteriorate.

The mall doesn’t have it all. With the economic collapse of 2008 many BAMs began to realize how bloated their operations had become. Many site location departments shrank or became as busy as the Maytag repairman. E-commerce was becoming a bigger piece of the pie, decreasing BAMs role in total retail sales. Plus the ease of finding a product online at the lowest price in a few simple clicks can be more appealing that walking the length of a mall and not finding a specific item you are looking for. Rather than competing against each other, BAMs are now up against convenience, availability and price, not to mention credit card security. In the wake of TargetTarget’s credit card breach, the discounter was ranked lowest in Prosper’s Shopper Security Score. On the flip side, Amazon appears to be setting the standard for retail security with the highest score.

One example of BAMs’ competition can be found in the recent holiday season. According to Prosper Insights & Analytics, 34% of Americans say that they completed 50% or more of their shopping online—that’s a 99% increase from the 2006 shopping season. In identifying which markets were more susceptible to the call of the World Wide Web, we found that holiday shoppers in the Northeast were most likely to shop online as 39% completed 50% or more of their purchases via the Internet. Shoppers in the West (35%), South (33%) and Midwest (31%) regions followed.

Consumer sentiment packs a punch. Consumers are cautiously optimistic cautious. Fifty percent of Americans say they’ve focused on needs over wants more in the last six months, 42% have become more practical in their purchases and 36% are more budget conscious. And employment continues to be a real economic drag as the labor participation rate dropped to a 35 year low. Further, 22% of Americans believe there will be more layoffs over the next six months.

Issues and uncertainty such as energy/fuel, utility costs and Obamacare are driving Americans’ discontent with the government; over half (55%) say they are unhappy with Washington. Plus don’t forget all the political uncertainty in the world, specifically in the Middle East. Put it all together and it equals slow sales in a competitive market, operating on an old brick and mortar model leading to an over-challenging environment for BAMs in 2014.

Change or die. The fixed cost of real estate combined with inventory and personnel have all been disrupted by online shopping growth. This will continue to force many retailers to reengineer their business in 2014, and for many that will mean consolidation/store closings. It’s already begun.

“He who lacks foresight and underestimates his enemy will surely be captured by him.” Sun Tzu, The Art of War

For these BAMs who are up against the proverbial wall, the first step will be to take the blinders off. Many have chosen to ignore, downplay, or even cover-up the impact of e-commerce. Thinking in-store shopper experience or more television advertising will solve the problem will only hasten the decline and not stop the trend. Secondly, the attention needs to turn to a consumer-centric business model rather than a real estate-centric model. Retailers will need to focus on understanding their greatest asset (their customers) and that means a new marketing model built on consumer insights. “Location, location, location” will become “Customer, customer, customer”. Retailers need to recognize that the customer is now in control. Customers are not owned by retailers. They now shop around, even if they have a store credit card or frequent shopper card. Unless you know how much they are spending with the competition, both online and in-store, you may be surprised with unpleasant news too late to react. Identifying the markets which are most vulnerable to online competition will be a good starting point.

Utilizing market intelligence hasn’t been a strength of retailers, but 2014 will be the year they will need to develop systems for collecting and analyzing data in order to survive. And not all data is created equal. As I wrote in a previous post, having foreknowledge from data mining of various data streams is key for big data success. Today’s focus on mining internal data/transactional data will leave many users of big data disappointed and out millions of dollars.

—————————————————- Gary Drenik is CEO of Prosper Insights & Analytics, a company that prides itself on turning data into solutions. www.ProsperDiscovery.com

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